Valuation Methods: the most common errors in valuation Givoly‚ D.‚ Lakonishok‚ J.‚ (1984)‚ The Quality of Analysts’ Forecasts of Earnings Goedhart‚ M.‚ Koller‚ T.‚ Wessels‚ D.‚ (2005)‚ The right role of multiples in valuation Heller‚ S.‚ (2010)‚ Estimating beta and Cost of Equity Capital for Non-traded Transportation Companies James‚ M.‚ Koller‚ T.‚ (2000)‚ Valuation in emerging markets Liu‚ J.‚ Nissim‚ D.‚ Thomas‚ J.‚ (2002)‚ Equity Valuation Using Multiples Luehrman‚ T.‚ (1997)‚ Using APV: A better tool
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+ B(Rmt-Rft)) =0?‚ if +/- mkt is inefficient Capital Structure: mix of securities (D&E)‚ assume shareholders interests are served by maxing value of firm Interest = Debt*r Levered Firm: EPS= Earnings After Interest/#shares bought Buy unlevered equity and borrow on own account: With shares of unlev equity‚ calculate payoff for all outcomes (rec‚ mod‚ exp) Borrow $ at r=10%‚ calculate interest ($*r) Find net payoff (payoff-int) Homemade leverage‚ if net cost is $20‚ levered equity=
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Question 2. Levered Inc. and Unlevered Inc. are identical in every respect except for capital structure. Both companies expect to earn $150 million in perpetuity‚ and both distribute all of their earnings as dividends. Levered’s perpetual debt has a market value of $300 million and the required return on its debt is 7%. Levered’s stock sells for $100 per share‚ and there are 5 million shares outstanding. Unlevered has 8 million shares outstanding worth $90 each. Unlevered has no debt. These firms
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Please use the capital asset pricing model to estimate the cost of equity. At the date of the case‚ the 74 over T-bonds. Which beta‚ risk-free rate‚ and risk premium did you use? Why? Financing Components Debt Equity Market Values Weight Cost of Capital (After Tax) $ 6‚823‚736‚197 0.85 3.72% $ 1‚176‚263‚803 0.15 28.18% Total: $ 8‚000‚000‚000 1.00 WACC WACC Inputs: Beta: Risk-Free Rate: Market Risk Premium: Pre-tax Cost of Debt: Income Tax Rate: Exhibit 2 - 2002 Balance Sheet Information: Debt
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Corporate Finance: The Core (Berk/DeMarzo) Chapter 7 - Fundamentals of Capital Budgeting 1) Which of the following statements is false? A) Because value is lost when a resource is used by another project‚ we should include the opportunity cost as an incremental cost of the project. B) Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis. C) Overhead expenses are associated with activities that are not directly attributable to a single business
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PART-II DATA ANALYSIS AND INTERPRETATION 6|Page 2.0 What is Leverage? Leverage can be defined as the ability of a firm to use its fixed cost assets or funds to magnify the returns to shareholders. According to J. F. Weston‚ Scott‚ Besley and E. F. Brigham‚ “Leverage is created when a firm has fixed cost associated either with its sales and production operation or with its financing characteristics.” Leverage in other sense is the degree to which an investor or business is utilizing
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assuming 100% equity financing • Avoids calculating debt-to-equity ratio for consecutive years • Use “Return on Assets” to discount 2008 – 2012 cash flows • Return on Assets = 7.82% ACC Base-Case Operating FCFs • Total Present Value of Unlevered Cash Flows 2008 – 2012: $1.272 B Excludes terminal value ACC Calculating Terminal Value • Common Assumption: Future cash flows look like the last FCF‚ times a growth factor • Using Weighted-Average Cost of Capital (WACC) we
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FIN 401-061 RYERSON UNIVERSITY Midterm Exam – March 4‚ 2013 – Prof. M. Toffanin Version A Time allowed: 2 hours Aids allowed: Closed book except for an 8 1/2” by 11” crib sheet. Answer all multiple choice questions on the scan sheet. All questions are worth 1 mark each. There are 30 multiple choice questions. Good luck! 1. Which version of the exam do you have? This is a free mark – take it. Make sure you answer it correctly‚ though. A) Version A B) Version B Please use the following
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describe how you could make arbitrage profits (what must you do) and what your maximum personal gain in wealth would be (profits). NOTE 40+80 = 120>100 Value of the levered firm > value of the unlevered firm Arbitrage argument says buy low sell high‚ sell levered portfolio/buy the unlevered portfolio (Strategy #2)- “sell short the levered firm (overpriced so we sell the stock short) Annual interest of r on debt instrument BL for payment of (.10 X 40 million) = 4‚000‚000
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our valuation. Our valuation process includes the following six steps. 1. Decide the present value of unlevered free cash flows. 2. Evaluate the weighted average cost of capital. 3. Appraise the value of tax shields. 4. Access the terminal value. 5. Estimate the present value of non-operating assets. 6. Applying the illiquidity discount. 2. What discount rate should Ms. Zhang use for unlevered FCF for 2008-2012? Is this the same rate that should be used to calculate the TV? Why or why not? 3.
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